Citation NR: 9740846
Decision Date: 12/09/97 Archive Date: 12/16/97
DOCKET NO. 95-37 305A ) DATE
)
)
On appeal from the
Department of Veterans Affairs Regional Office in St.
Petersburg, Florida
THE ISSUE
Entitlement to waiver of recovery of loan guaranty
indebtedness.
WITNESSES AT HEARING ON APPEAL
Appellant and spouse
ATTORNEY FOR THE BOARD
Hilary L Goodman, Counsel
INTRODUCTION
The veteran apparently had active service from October 1966
to October 1968.
This matter comes before the Board of Veterans' Appeals (the
Board) on appeal from an April 1995 decision by the Committee
on Waivers and Compromises (Committee) located at the
Department of Veterans Affairs (VA) St. Petersburg, Florida,
Regional Office (RO) which denied the veteran's request for a
waiver of recovery of his loan guaranty indebtedness in the
original amount of $7,387.17, plus accrued interest. The
undersigned Member of the Board conducted a hearing in which
the veteran and his spouse testified in the Indianapolis,
Indiana, Regional Office.
CONTENTIONS OF APPELLANT ON APPEAL
The veteran asserts that, as they were unaware that the
monthly mortgage payments would include almost $100 to escrow
the funds for taxes and insurance, they were unable to make
full payments from the beginning. It is asserted that
partial payments were refused and that they did try to work
with the loan officer but were unsuccessful because of their
insufficient funds. It is further asserted that they would
have never promised to make three full payments at one time
as they did not have that kind of money and that they never
refused to sell the house and, in fact, called in several
real estate agents to sell the property but to no avail.
DECISION OF THE BOARD
The Board, in accordance with the provisions of 38 U.S.C.A.
§ 7104 (West 1991 & Supp. 1997), has reviewed and considered
all of the evidence and material of record in the veteran's
claims file. Based on its review of the relevant evidence in
this matter, and for the following reasons and bases, it is
the decision of the Board that the preponderance of the
evidence does not show the existence of bad faith on the part
of the veteran in the creation of the loan guaranty
indebtedness.
FINDINGS OF FACT
1. All evidence relevant to the issue of the existence of
bad faith on the part of the veteran has been obtained by the
originating agency.
2. There was a default of the veteran's VA guaranteed loan
necessitating a foreclosure sale of the subject property
resulting in a loan guaranty indebtedness of $7,387.17, plus
accrued interest.
3. The evidence does not clearly indicate that the veteran
exercised a willful intent to take advantage of the VA.
CONCLUSIONS OF LAW
1. There was a loss after default of the property which
constituted the security for the loan. 38 U.S.C.A.
§§ 5107(a), 5302 (West 1991); 38 C.F.R. § 1.964(a) (1997).
2. There was no bad faith on the part of the veteran in the
creation of the loan guaranty indebtedness. 38 U.S.C.A.
§ 5302 (West 1991).
REASONS AND BASES FOR FINDINGS AND CONCLUSIONS
The Board has found that the veteran's claim with respect to
the issue of the existence of "bad faith" is "well grounded"
within the meaning of 38 U.S.C.A. § 5107(a). That is, he has
presented a claim which is plausible. We are also satisfied
that all relevant facts pertaining to bad faith in the
creation of the indebtedness have been properly developed.
I. Factual Background
The documentary evidence before the Board supports the
following factual summary: In November 1980, the veteran and
his spouse purchased a home in Florida, for $39,900,
utilizing a 13.5 percent, VA guaranteed loan in the amount of
$39,900. Monthly payments, including taxes and insurance,
were $522.35. In conjunction with the purchase of the
property, the veteran executed a VA Application for Home Loan
Guaranty, VA Form 26-1802a. In that document, the veteran
certified and agreed to repay the VA any claim which VA would
be required to pay the note holders on account of default
under the terms of the loan.
Contained in the November 1980 mortgage agreement, signed by
the veteran and his spouse, was the provision “If the
indebtedness secured hereby be guaranteed or insured under
Title 38, United States Code, such Title and Regulations
issued thereunder and in effect on that date hereof shall
govern the rights, duties and liabilities of the parties
hereto...” In conjunction with the purchase, an appraisal of
the subject property was conducted, and the property was
determined to be valued at $39,900.
A Notice of Default was issued by the note holder to the VA
in April 1981. This showed that the first uncured default
occurred on February 1, 1981. It was noted that the
veteran's attitude towards the default was good; it was
reported that poor money management seemed to be the reason
for the default. It was related that the veteran refused the
possibility of selling the house. The note holder, after
reporting in May 1981 that the loan had been reinstated,
indicated in a June 1981 Notice of Default that the check had
been rejected due to insufficient funds. It was reported
that the spouse’s attitude toward the default was good. The
VA was advised by the note holder that the veteran's spouse
had stated that they were sending two payments at once. She
also stated that they would make 1 and 1/4 payments before
June 30 and July 15 and that the August payment would be on
time. A Notice of Intention to Foreclose was issued in July
1981.
The VA contacted the veteran by telephone in July 1981; he
indicated that they had called the note holder several days
ago and that he was trying to borrow the money to reinstate
the loan. The VA also contacted the note holder by telephone
in July 1981; it was indicated that the veteran had
insufficient funds for a repayment schedule. In an October
1981 telephone conversation with the VA, the veteran's spouse
related that they could not afford the house when they closed
because of the escrow payment; she indicated that they were
not aware of the escrow and did not have sufficient funds to
bring the loan current or even maintain payments. It was
reported that they were not interested in keeping the house
but did not want their credit blackened.
A liquidation appraisal of the subject property was conducted
by an independent appraiser on behalf of the VA December
1981. The subject property was valued in "as is" as well as
repaired condition at $38,000. In a December 1981 VA report
it was noted that the difference in value between the
original appraisal and the current one was the change in
market conditions. It was noted that the veteran and his
spouse were occupying the property and that the property was
secure. In December 1981, foreclosure was granted and a
judgment was entered against the veteran and his spouse in
the total amount of $44,923.71. Following the foreclosure
sale, title to the property was transferred to the VA.
Following the sale of the subject property in October 1982
for $41,500, in November 1982 the VA paid the holder of the
original note, Cameron-Brown Company, $7,478.17. The
veteran's loan guaranty indebtedness was established at
$7,387.17, plus accrued interest.
II. Analysis
The law precludes a waiver of recovery of an overpayment or a
waiver of collection of an indebtedness where any one of the
following elements is found to exist: (1) Fraud, (2)
misrepresentation, or (3) bad faith. 38 U.S.C.A. § 5302(c).
Upon this finding, any contention or evidence relating to
equity and good conscience necessitating a waiver, such as it
relates to undue hardship, etc., becomes "moot". VA's
working definition of "bad faith" is a willful intention to
either seek an unfair advantage or to neglect or refuse to
fulfill some duty or contractual obligation. Veterans
Benefits Administration Circular No. 20-90-5, New Standards
for Waiver Consideration (February 12, 1990). Circular 20-
90-5 further states that “[I]n the home loan program, bad
faith would most likely exist when a veteran/obligor abandons
a VA guaranteed property despite having the financial ability
to make mortgage payments.”
In the present case, the veteran did not abandon the VA
guaranteed property. While the uncured defaults began almost
immediately after the property was purchased in late 1980,
testimony has been given that they were unable to make full
payments from the beginning as they were unaware that the
monthly mortgage payments would include an escrow for taxes
and insurance. The record shows that the veteran's spouse
advised the VA that this was the situation in an October 1981
telephone conversation. Based on the current record, it
cannot be concluded that the veteran abandoned his VA loan
obligation despite having the financial ability to make
mortgage payments. Although one 1981 entry suggest that they
refused to sell the subject property, they have testified
that they called in several real estate agents in an attempt
to sell the property.
In their decision, the Committee's finding of "bad faith" was
apparently based upon the veteran's general failure to adhere
faithfully to the loan payments, and the further belief that
the veteran did not cooperate in pursuing alternatives to
foreclosure. Despite the technical abandonment of the
property on the part of the veteran when he did not make the
mortgage payments, it is unclear from the record whether he
then, in reality, had the financial ability to make those
payments. Just as there are various bases for a finding of
bad faith, there are also many circumstances which can
significantly dilute or negate a finding of the "willful
intention to either seek an unfair advantage or to neglect or
refuse to fulfill some duty or contractual obligation." The
evidence before the Board presents such a case.
It is clear from the record that the veteran maintained the
property, negating a finding of an absolute abandonment.
Secondly, it cannot be determined from the evidence that the
veteran had the financial ability to make his mortgage
payments at the time of the initial default. With respect to
his finances, the veteran has offered a consistent, plausible
explanation as to why he was unable to make the payments.
The record neither proves nor disproves the accuracy of his
explanation. Without such proof, the Board must take the
veteran at his word.
The Committee apparently assumed that the financial
circumstances of the veteran at the time of the 1981 default
allowed him to make the monthly payments. In their finding
of bad faith, the RO did not recognize mitigating
circumstances such as the veteran's attempts to cure the
defaults. This is not to say that the veteran was without
fault in the creation of the debt; only that the record has
not been developed sufficiently in the Board’s judgment to
establish the veteran's willful intent to seek an unfair
advantage. In weighing the positive and negative evidence,
the Board finds that the Committee has not shown the
requisite "willful intent" on the part of the veteran in the
creation of the loan guaranty debt, fundamental to a finding
of "bad faith."
ORDER
Waiver of recovery of a loan guaranty indebtedness is not
barred by reason of bad faith. To this extent, the appeal is
granted.
REMAND
The Board, based upon the above decision, finds that a
determination on the question of waiver of recovery of the
loan guaranty indebtedness must be considered under the
standard of equity and good conscience. It is herein noted
that the veteran has requested an explanation as to whether
the sale of the subject property in October 1982 for $41,500
affected the amount of the current indebtedness.
Accordingly, the claim is REMANDED to the originating agency
for the following action:
1. The RO is requested to respond, in
writing, to the veteran's request for an
explanation as to whether the sale of the
subject property in October 1982 for
$41,500 affected the amount of the
current indebtedness.
2. The veteran should be contacted and
asked to complete and return a financial
status report (VA Form 4-5655) reflecting
current income from all sources, monthly
expenses and assets. That information
should then be associated with the claims
file.
3. Upon completion of the above, the
Committee should review the veteran’s
claim and, in a written decision, address
each of the elements of equity and good
conscience, or indicate why each factor
is not considered pertinent. If the
decision remains unfavorable to the
veteran, all procedures necessary to
satisfy the requirements of due process
should be completed. This should include
a supplemental statement of the case
which includes a detailed summary of the
creation of the overpayment, the amount
thereof, and the Committee’s reasons for
its decision as well as all appropriate
laws and regulations, including 38 C.F.R.
§ 1.965(a) (1997). The veteran should be
given the appropriate period of time in
which to respond.
The appeal should be returned to the Board for further
appellate consideration, if otherwise in order. The purpose
of this REMAND is to ensure due process. No action is
required by the veteran until he receives further notice.
ROBERT D. PHILIPP
Member, Board of Veterans' Appeals
NOTICE OF APPELLATE RIGHTS: Under 38 U.S.C.A. § 7266 (West
1991 & Supp. 1997), a decision of the Board of Veterans’
Appeals granting less than the complete benefit, or benefits,
sought on appeal is appealable to the United States Court of
Veterans Appeals within 120 days from the date of mailing of
notice of the decision, provided that a Notice of
Disagreement concerning an issue which was before the Board
was filed with the agency of original jurisdiction on or
after November 18, 1988. Veterans’ Judicial Review Act, Pub.
L. No. 100-687, § 402, 102 Stat. 4105, 4122 (1988). The date
that appears on the face of this decision constitutes the
date of mailing and the copy of this decision that you have
received is your notice of the action taken on your appeal by
the Board of Veterans’ Appeals. Appellate rights do not
attach to those issues addressed in the remand portion of the
Board’s decision, because a remand is in the nature of a
preliminary order and does not constitute a decision of the
Board on the merits of your appeal. 38 C.F.R. § 20.1100(b)
(1996).
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